Fed meet to determine market direction

The Sensex has been moving in the range of 18,300-19,900 since the third week of October and is now trading at the higher end of the range. Both the Sensex and the Nifty have failed to close above their psychological levels of 20,000 and 6,000 ,respectively.

The benchmark indices are likely to see new highs, after a period of consolidation, if the large caps perform better. But a Fed rate cut and industrial growth figures, which are to be announced on December 11, will have an important bearing on the market sentiment.

An opinion is gaining ground that the nervous ninety syndrome has lasted too long, with the markets being in a consolidation mode since the last two months. The Sensex has been encountering a strong resistance at 19,900 and Nifty has been finding it tough to cross 5,900. The selling by FIIs, despite the buying by domestic funds, has acted as a dampener.

The FIIs have, however, turned net buyers this month, as the Fed is expected to reduce the interest rates at its meeting scheduled next week. A rate cut in US will make arbitrage attractive for the FIIs as interest rates in India are expected to remain stable. The FIIs are big arbitragers on the NSE derivative segment.

The employment data released by the US on Friday has shown a bias towards growth. This will translate into lesser pressure on the US Fed to cut the rates. The interest rates are being reduced in the US to prevent a recession. Higher employment would mean less chances of a recession.

The industrial production data for the month of October would be closely watched. The September IIP figures were a mere 6.4 per cent. It will be bad news if the slowdown continues in October.

Recent employment data suggests that the fear of recession is not rampant. “Most problems are in housing sectors. The remaining sectors are not doing that bad,” said Subir Gokarn, Chief Economist, Standard & Poor’s Asia-Pacific. “Countries such as India need not worry much.”

Moreover, the fact remains that India is growing on the strength of domestic demand.” he emphasized. S&P is neutral on the Indian equity markets in 2008.

The small and mid caps performed better than the Sensex last week, as has been the case over the last month.

The Sensex provided weekly returns of 3.11 per cent and monthly gains of 4.76 per cent. The BSE small cap index rose by 7.75 per cent on a weekly basis and 18.01 per cent over the month. The mid cap index gave returns of 5.48 per cent for the week and 13.54 per cent through the month.